Gaming Obamacare

Last month I wrote a two-part series (part 1, part 2) on the immediate purposes for and effect of the Patient Protection and Affordable Care Act (PPACA), also known as Obamacare. Today, I'll address one of the unintended consequences of Obamacare.

As I related in the first column, the first priority of Obamacare was to shift some of the current Health Care Expenditures (HCE) being paid for by insurance companies and the government to the individuals receiving the procedures and prescriptions paid for by them. Many individuals have discovered that, as a result of their employer's plans being modified to meet the PPACA requirements, especially for "Essential Health Benefits," that their monthly premiums and deductibles have been increased.

The biggest impact has been on access to and funding for prescriptions. It's most common for prescriptions that were covered with low or no insurance co-pays now not to be covered until the annual deductible has been reached. For example, a family with a previous plan with a monthly premium of $300 and an annual deductible $1,000 with prescriptions being paid for after a $10 co-pay per 30-day supply may now be on a plan with a $600 monthly premium with a $3,000 annual deductible with no co-pay for prescriptions until the annual deductible is reached. Once the deductible is reached, however, all prescriptions costs are covered with no co-pay.

This sets up a dynamic difference in the way individuals treat the allocation of their individual HCE. They've essentially been invited to game the new rules to maximize the utility and individual benefit they receive for the allocation of their personal capital.

Let's say the aggregate cost of two ongoing prescriptions annually is $3,000. On their old plan, this was paid for with a $10 dollar co-pay each for a 30-day supply. Their annual out of pocket expense $240, with the residual $2,760 being paid for by their insurance provider, either public or private.

On their new plan, assuming they have no other ongoing expenses, they will have to pay the entire cost of $3,000 annually to continue to receive their prescriptions, and their insurance provider will pocket the monthly premium with no outlay for the prescriptions. That's a good deal for the insurance company, and the $3,000 annual expense now becomes a perpetual sunk cost to the family, unless they decide to forego the prescriptions.

From the family's perspective, the goal logically should be in figuring out how they can reach their annual $3,000 deductible for HCE on things other than prescriptions, as early into each calendar year as possible, in order to allow for their prescriptions to be paid for by their insurance provider rather than by them. One logical financial decision would be to choose a cosmetic or elective procedure that is not covered by their insurance but that has expenses that may qualify to meet their annual deductible for HCE.

The family may choose gastric bypass surgery for one of them, a procedure most insurance plans don't cover, but which may be made eligible to meet an annual HCE deductible with a doctor's letter of opinion concerning degree of medical need. The $15,000 average cost of the procedure could be financed for five years at 8% annual interest, resulting in monthly payments of $302. The couple could then opt to prepay each year's total due of $3,624 on Jan. 1, thereby exceeding the $3,000 annual HCE deductible, which affords for their prescriptions to be 100% paid for by their insurance provider.

Before accounting for the tax deductibility of HCE, the couple's marginal cost for prescriptions has been reduced to $624 annually from $3,000. The total amount of capital allocated to HCE, between the individual and the insurance provider, has actually increased, however.

The germane point, from an aggregate economic perspective, is that instead of the allocation of resources to HCE being reduced -- one of the principal goals of Obamacare -- it has actually been increased. This increase must come at the expense of other sectors of the economy. It would perhaps preclude the couple from buying a new car, furniture, vacation or funding savings.

As more people begin to figure out how to game their new health care plans, the immediate benefits will flow to the providers of all kinds of health care services, including elective or even cosmetic procedures that may be "made" to meet deductible eligibility.

The public companies best positioned to benefit from this kind of gaming are the hospital owners: HCA Holdings (HCA), Universal Health Services (UHS), Community Health Systems (CYH), Tenet Healthcare (THC) and Lifepoint Hospitals (LPNT).